US Bankruptcy Court Set to Weigh in on Bitcoin's Currency Status

A California bankruptcy court is set to weigh in on whether bitcoin should be considered a currency.

The hearing, set for 19th February, follows months of legal wrangling between the trustee of bankrupt bitcoin mining firm HashFast and Marc Lowe, a former promoter for the service who operated under the handle 'CypherDoc'.

Trustee Michael Kasolas filed suit against Lowe in February of last year, seeking to recoup 3,000 bitcoins that had been paid by HashFast to Lowe for promoting the service, including a series of posts on the Bitcoin Talk forum.

The trustees alleged that Lowe was an insider who received preferential treatment from the firm, including the awarding of a refund while other customers were awaiting theirs, prior to HashFast’s bankruptcy.

Commodity or currency?

In a 22nd January filing, the trustees asked for a summary judgment requiring that Lowe return the 3,000 bitcoins, as well as – perhaps more importantly – a determination that bitcoin is a commodity rather than a currency.

By doing so, the court would essentially require that Lowe pay back the 3,000 BTC at today’s rate rather than the value, in dollar terms, when he received it in September 2013.

The filing states:

“Accordingly, the Court should grant the Motion and enter an order directing that if the subject transfers are avoided, the estate’s recovery shall be either the 3,000 bitcoin themselves or the value of those bitcoin at the transfer date or time of recovery, whichever is greater. This result is consistent with both established Ninth Circuit law and section 550(a)’s purpose of restoring the estate to the financial condition it would have enjoyed had the transfers not occurred.”

Predictably, Lowe pushed back, seeking the opposite ruling in a 5th February court filing. The heart of his argument was that, during the time he was promoting HashFast’s products, the company was treating bitcoin as a type of currency.

“The bitcoin Dr. Lowe received from HashFast should be treated as currency, not a commodity,” the filing states. “That was how HashFast intended bitcoin to be treated at the time it sent the bitcoin to Dr. Lowe, and that is how federal agencies, merchants, courts, the Debtor, and the Trustee himself have treated bitcoin. The Court should not grant the Trustee the undeserved windfall he is seeking.”

Further, Lowe asked the court to reject the trustee’s claim that the bitcoin transfers were fraudulent in nature.

The suit stems from the firm’s presale of HashFast’s BabyJet bitcoin mining products, which some customers said they did not receive after paying thousands of dollars per unit. HashFast later denied it was facing insolvency, but ultimately ended up in bankruptcy court.

Acknowledging that bitcoin can and has been used as a medium of exchange, the trustees go on to state that because it is deemed as a kind of property or commodity, the bitcoin in question would appreciate in value – a fact that should be “to the benefit of creditors and the estate”.

“The law on recovery under section 550(a) [of the US Bankruptcy Code] is well-settled and indisputable,” the filing goes on to state. “The Court should grant the Motion and enter an order directing that, if the transfers are avoided, the estate is entitled to recover either the 3,000 bitcoin or the value of the bitcoin measured at the transfer date or the time of recovery, whichever is greater.”

In his response, Lowe pointed to rulings by the US Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission, both of which have deemed bitcoin to be a kind of money, or a substitute for money, for regulatory purposes.

Further, the defense pushed back against what it called a misinterpretation of the IRS and CFTC rulings.

“Like the IRS guidance, the CFTC order is regulating bitcoin in essentially the same manner as it regulates other forms of currency. The CFTC merely defined bitcoin as property or a commodity for the purposes of regulating it, while at the same time essentially acknowledging that it is a currency,” the filing states. “Accordingly, the Trustee's argument with regard to the CFTC is nothing more than semantics, asking the Court to adopt a form over substance interpretation.”

Kasolas is being represented by San Francisco-based law firm Duane Morris LLP, while Lowe is being represented by Brian Klein of Los Angeles-based law firm Baker Marquart LLP and David Poitras of Jeffer Mangels Butler & Mitchell LLP.

Correction: Mark Lowe's online handle is 'CypherDoc', not 'cyberdoc'. This article has been updated to correct this error.